Thursday, February 9, 2012

Is ownership in a residential house property material under sections 54 & 54EC


The Karnataka High Court in the case of DIT, International Taxation v. Mrs. Jennifer Bhide [2011] 15 taxmann.com 82 has held that neither section 54 nor section 54EC stipulates that deductions under these sections shall be available only if investment in the specified asset is made in the name of the assessee only. Hence, deduction under section 54 and section 54EC cannot be denied to an assessee if she has made such an investment jointly with her spouce.
INTRODUCTION
1. The intention of section 54 of the I.T. Act, 1961 is to provide relief to the assessee, being an individual or HUF, from the tax liability which would arise in case of long-term capital gain ('LTCG') on the sale of a residential house property, provided the assessee further invests the amount of capital gain (subject to other conditions) in another residential house property within the prescribed time-limit, thereby making him the owner of another residential house property. Similarly, the objective of section 54EC is to provide relief from the tax liability in case of LTCG from the transfer of an asset, provided the assessee invests the amount of capital gain in the long-term specified asset, as prescribed in the said section.
FACTS OF THE CASE
2. The assessee happened to be a non-resident individual. She filed her return of income for the year 2007-08 declaring taxable income of Rs. 62,41,068. During the assessment proceedings under section 143(3) of the Income-tax Act, 1961, the assessing authority noticed that the assessee had sold a residential property for Rs. 2,21,00,000 and had invested an amount of Rs. 49,09,804 in purchase of residential property in her name and the name of her husband jointly and claimed exemption under section 54 against the said investment for Rs. 49,09,804. On verification of the purchase deed, the assessing authority found that the above property was not in the name of the assessee alone but was also in the name of her husband. It, therefore, held that as the ownership of the property was shared with someone else, the property could not be said to have been purchased by the assessee alone and, therefore, only 50% of the investment was to be allowed as exempt in the hands of the assessee. He further observed that similar investment was made for Rs. 50 lakhs in the Rural Electrification Corporation Ltd. bonds in the names of Mrs. Jennifer Bhide (the assessee) and Mr. Vikram Anil Vasant Bhide (husband of the assessee) and exemption for the entire amount of Rs. 50 lakhs under section 54EC was claimed by the assessee. Therefore, he disallowed 50% of the investment in the Bonds also which was made in the name of her husband. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), who confirmed the order of the assessing authority. Aggrieved by the same, the assessee preferred an appeal to the Tribunal. The Tribunal came to the conclusion that neither section 54 nor section 54EC of the Act mandates that the purchase of the property or investment in bonds should be exclusively in the name of the assessee. Though the name of the assessee's husband was shown in the sale deed (made for the acquisition of the property for the purpose of section 54) as well as in the bonds, yet the entire consideration for acquisition of the same was shown from the assessee, therefore, as per law the assessee's husband had no right in the above said investments. In that view, the Tribunal held that both, the assessing authority and the Appellate Commissioner were in error in denying the benefit of deduction and allowed the deduction. However, the revenue filed an appeal before the High Court of Karnataka against this order of the Tribunal.
3. ISSUES INVOLVED
 1.  Whether sections 54 & 54EC necessitate that the right of ownership should vest in the assessee only for the purpose of claiming exemption or the fact of the payment of entire consideration by the assessee is sufficient to enable him/her to claim exemption under the said sections?
 2.  Whether payment of consideration by both the joint owners is compulsory for making them the rightful owners of a property or only the nomenclature would be the deciding factor for determining the ownership, irrespective of the payment of consideration?
4. ANALYSIS OF THE CASE
Reply to question No. 1. The first question can be replied keeping a close eye on sections 54 & 54EC.
Section 54 insists only on the purchase or the construction of a residential house by the assessee within the prescribed time-limit. Further, it's sub-section (2) more particularly mandates the appropriation of the amount of capital gain by the assessee and at the same time provides for the deposit of the amount which is not so appropriated by the assessee before the due date of filing return to avoid the tax liability. Thus, the section provides only for the appropriation or in other words, the payment of the consideration for the purchase or the construction of the residential house, without stating anything regarding the ownership of the residential house so purchased or constructed. Similarly, section 54EC requires the investment by the assessee (subject to other consideration) and does not provide anything with regard to the ownership of the investment so made for the purpose of claiming the exemption. So, it can be safely concluded that the right of ownership may vest in some other person also and need not necessarily be with the assessee only for the purpose of claiming exemption under sections 54 & 54EC. The fact of the payment of consideration by the assessee is mandatory and sufficient enough to enable him/her to claim exemption under the said sections. In addition, the same view has been taken by the Hon'ble High Court of Madras in the case of CIT v. V. Natarajan [2006] 287 ITR 271/154 Taxman 399 and in the judgment of the Hon'ble Punjab and Haryana High Court in the case of CIT v. Gurnam Singh [2010] 327 ITR 278/170 Taxman 160.
Reply to question No. 2. The expression "Owner" in common parlance is understood as a person who is having a right in any property, may be movable or immovable. However, as far as the ownership is concerned, it can be obtained either by the payment of consideration or otherwise also, e.g., where there are joint owners of a property but the payment of consideration is made by one of them only and the other is made as a joint owner out of love and affection. Further, the meaning of the term "Rightful Owner" may be construed as an owner who is having the right to enforce his title in a property, not just because of the fact that he is its owner but more importantly, because he has paid the consideration to become its owner. Thus, a line of demarcation exists between an "Owner" and a "Rightful Owner". An example in this regard is where a person is made as the owner by way of executing a Will/GPA in his favour. However, it is worth mentioning that such a Will/GPA shall be revocable, i.e., it can be revoked by the executor later on, as no consideration is paid by the person in whose favour the Will/GPA was executed. Thus, although he is made the owner, yet he cannot be reasonably be assumed to be the "Rightful Owner" but once the consideration is paid for executing the Will/GPA it becomes irrevocable and the payer becomes the "Rightful Owner" in addition to be simply an owner.
In addition, section 45 of the Transfer of Property Act is relevant to decide the question. The said section is reproduced below:
"Where immovable property is transferred for consideration to two or more persons, and such consideration is paid out of a fund belonging to them in common, they are, in the absence of a contract to the contrary, respectively entitled to interests in such property identical, as nearly as may be, with the interests to which they were respectively entitled in the fund; and, where such consideration is paid out of separate funds belonging to them respectively, they are, in the absence of a contract to the contrary, respectively entitled to interests in such property in proportion to the shares of the consideration which they respectively advanced.
In the absence of evidence as to the interests in the fund to which they were respectively entitled, or as to the shares which they respectively advanced, such persons shall be presumed to be equally interested in the property."
In view of the above section, where there are joint owners of a property, both of them shall be entitled to interest in such a property to the extent of their respective shares in the payment of consideration. Thus, where the consideration is paid equally by both the joint owners, both of them shall have equal interest in the property. Moreover, where the consideration is paid by one person only and the other is made as the joint owner out of love and affection only, the said other person cannot be said to be the rightful owner but only an owner according to the provisions of the Transfer of Property Act. Hence, nomenclature cannot be assumed to be the deciding factor of ownership and the payment of consideration has much more importance.
4.1 Held - In the absence of essence of ownership in sections 54 & 54EC, an assessee cannot be denied the benefit of deduction for the investment made under those sections merely because the investment is made in joint name and the fact of payment of consideration has to be given due importance.
CONCLUSION
5. Following principles have been laid down by this judgment:
(a)  Neither section 54 nor section 54EC requires that investment should be made in the name of the assessee;
(b)  Once the sale consideration is utilized for the purpose mentioned under sections 54 and 54EC, the assessee would be entitled to the benefit of these provisions;
(c)  In the absence of an express provision that the investment should be in the name of the assessee only, any such interpretation would amount to the Court introducing the said word in the provision which is not the case; and
(d)  It amounts to the Courts legislating on the issue when the Parliament has deliberately not used those words in the said provision.

By CA GAURAV PAHUJA

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